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Lacklustre Candy Crush IPO spooks investors

Critics ask whether too many tech companies are going public, multiples to earnings valuations are too high and if investors buying into peak hype are risking getting burned.

Riccardo Zacconi, CEO of King, celebrates on the floor of the New York Stock Exchange after King's initial public offering Wednesday. King is the maker of the popular mobile game Candy Crush.
Photo by Andrew Burton/Getty Images (Andrew Burton / GETTY IMAGES)

A lacklustre debut for the shares of the company behind hit digital game Candy Crush Saga is fueling fears of a bubble in the tech IPO market.

“I mean, for the first time since the late 90s I’m starting to get the feeling again that we’re starting to enter an IPO mania and most of us remember how that went after the 2000-2001 bubble burst,” Internet entrepreneur Stephan Paternot told CNBC Wednesday.

He said too many companies are going public, multiples to earnings valuations are too high and investors buying into peak hype are risking getting burned when the bubble deflates.

A string of tech startups are reportedly nearing a U.S. IPO after a successful Twitter floatation in November and a jump this year in Facebook shares after the social network’s initial offering in 2012.

Candidates include digital music service Spotify, online rental game maker AirBnB, as well as Chinese ecommerce giant Alibaba which is pursuing an offering expected to raise $15 billion (U.S.)

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And while most investors don’t have ground floor access to initial share offerings, with the stock allotted to institutional investor and high net worth individuals, they should still be cautious about the stocks, said Kathleen Smith of Renaissance Capital.

That’s particularly true after lock up agreements for insiders expire and employees and other are able to get out, said Smith, who believes the latest IPO surge is about three quarters complete

Shares in Candy Crush developer King Digital Entertainment LLP tumbled 16 per cent in their first day of trading in New York Wednesday on investor skepticism about whether the company can replicate the success of the addictive game, which accounts for the bulk of its sales.

The stock closed at $19 (U.S.), below its $22.50 initial price, with the IPO price valuing King at $7.09 billion.

In a U.S. prospectus filing, King co-founder and CEO Riccardo Zacconi said the company had so far launched five games for mobile phones and all had attracted substantial fan bases.

“Mobile usage is exploding and games are commanding the lion’s share of time spent,” he said.

“Consumption habits have changed — mobile has meant that people consume more digital content than they ever have before, and they want to be entertained over short periods of time whenever and wherever they are.”

He said company has a unique business model that allows it to test games on multiple platforms and said the $500 million (U.S.) raised in the IPO will help King develop and acquire new properties.

The filing showed a strong and profitable balance sheet, but also disclosed a slowdown in quarterly revenues at the end of 2013.

Candy Crush Saga, a puzzle game featuring different-colored candies, has 97 million daily active users and accounts for as much as 78 per cent of King’s annual sales, the prospectus shows.

King generates revenue when users purchase virtual items, such as extra lives or additional content, for about $1 each. Its other games, including Farm Heroes Saga and Bubble Witch Saga, each have fewer than 20 million daily users.

The company offered the shares at a discount to its publicly traded peers, including Chinese game developer Giant Interactive Group Inc. and Zynga Inc., data compiled by Bloomberg show.

King’s discount may reflect lessons investors learned following Zynga’s debut. The maker of FarmVille went public in December 2011, dropped 5 per cent in its first day of trading and slumped almost 80 per cent in the subsequent year.

Zynga’s revenue, like King’s, was concentrated in one major source at the time of its IPO: more than 90 per cent of its sales came from Facebook. Shares continued to slide as Zynga’s users started defecting to Candy Crush.

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